Problem 1:
Materials Variance Analysis:
The Schlosser Lawn Furniture Company uses 12 meters of aluminum pipe at $0.80 per meter as
standard for the production of its Type A lawn chair. During one month's operations, 100,000 meters of
the pipe were purchased at $0.78 a meter, and 7,200 chairs were produced using 87,300 meters of pipe.
The materials price variance is recognized when materials are purchased.
Required: Materials price and quantity variances.
Solution:
Actual quantity purchased
actual quantity purchased
Materials purchase price variance
Meters of
Unit Cost
pipe
100,000 $0.78 actual
$0.80
100,000
standard
--------------------100,000
=======
Actual quantity used
87,300
Standard quantity allowed
86,400
Materials quantity variance
------------900
=======
$(0.02)
Amount
$78,000
$80,000
----------$(2,000)
fav.
=======
=======
0.80
$69,840
standard
0.80
$69120
standard
------------- ------------0.80
$720 Unfav
=======
=======
Problem 2:
Materials Variance Analysis:
The standard price for material 3-291 is $3.65 per liter. During November, 2,000 liters were purchased at
$3.60 per liter. The quantity of material 3-291 issued during the month was 1775 liters and the quantity
allowed for November production was 1,825 liters. Calculate materials price variance, assuming that:
Required: Materials price variance, assuming that:
1. It is recorded at the time of purchase (Materials purchase price variance).
2. It is recorded at the time of issue (Materials price usage variance).
Solution:
Liters
Unit cost
Amount
Actual quantity purchased
2,000
Actual quantity purchased
2,000
Actual quantity used
--------2,000
======
1775
Actual quantity used
1775
Materials purchase price variance
Materials price usage variance
-------1775
======
3.60 actual
$7,200
3.65
7,300
standard
--------------------$ (0.05)
$(100) fav.
======
======
3.60 actual $6390.00
3.65
$6478.75
standard
--------------------$(0.05)
(88.75)
======
=======
Problem 3:
Labor Variance Analysis:
The processing of a product requires a standard of 0.8 direct labor hours per unit for Operation 4-802 at a
standard wage rate of $6.75 per hour. The 2,000 units actually required 1,580 direct labor hours at a cost
of $6.90 per hour.
Required: Calculate:
1. labor rate variance or Labor price variance.
2. Labor efficiency or usage or quantity variance.
Solution:
Actual hours worked
Time
1,580
Actual hours worked
1.580
Labor rate variance
--------
Rate
$6.90 actual
$6.75
standard
--------
1,580
$0.15
=====
Actual hours worked
1,580
Standard hours allowed
1,600
Labor efficiency variance
Problem 4:
Factory Overhead Variance Analysis:
---------(20)
======
Amount
$10,902
10,665
-------$237
unfav.
=====
=====
$6.75
$10,665
standard
$6.75
$10,800
standard
---------------------6.75 standard $(135) fav.
======
======
The Osage Company uses a standard cost system. The factory overhead standard rate per direct labor
hour is:
Fixed: $4,500 / 5,000 hours
Variable: $7,500 / 5,000 hours
=
=
$0.90
$1.50
-------$2.40
For October, actual factory overhead was $11,000 actual labor hours worked were 4,400 and the
standard hours allowed for actual production were 4,500.
Required: Factory overhead variances using two, three and four variance methods.
Solution:
Two Variance Method:
Actual factory overhead
Budgeted allowance based on standard hours allowed:
Fixed expenses budgeted
Variable expenses (4,500 standard hours allowed × $1.50 variable
overhead rate)
Favorable controllable variance
Budgeted allowance based on standard hours allowed
Overhead charged to production (4,500 standard hours allowed ×
$2.40 standard rate)
$11,000
$4,500
$6,750
----------- $11,250
----------$ (250)
fav.
======
$11,250
$10,800
-----------$450
unfav.
======
Unfavorable volume variance
Three Variance Method:
Actual factory overhead
Budgeted allowance based on actual hours worked:
Fixed expenses budgeted
Variable expenses (4,400 actual hours worked × $1.50 variable
overhead rate)
Favorable spending variance
Budgeted allowance based on actual hours worked
Actual hours worked × Standard overhead rate (4,400 hours × $2.40)
Unfavorable spending variance
$11,000
$4,500
$6,600
----------- $11,100
----------$ (100)
fav.
======
$11,100
$10,560
-----------$540
unfav.
======
$10,560
Actual hours worked × Standard overhead rate (4,400 hours × $2.40)
Overhead charged to production (4,500 standard hours allowed ×
$2.40 standard rate)
$10,800
----------$ (240)
fav.
=====
Favorable efficiency variance
Four Variance Method:
Actual factory overhead
Budgeted allowance based on actual hours worked:
Fixed expense budgeted
Variable expenses (4,400 actual hours worked × $1.50 variable
overhead rate)
$11,000
$4,500
$6,600
----------- $11,100
----------$ (100)
fav.
======
$11,100
$11,250
----------$ (150)
fav.
======
Favorable spending variance
Budgeted allowance based on actual hours worked
Budgeted allowance based on standard hours allowed
Favorable variable overhead efficiency variance
Actual hours × fixed overhead rate (4,400 actual hours × $0.90 fixed
overhead rate)
Standard hours allowed × fixed overhead rate (4,500 actual hours ×
$0.90)
$3,960
4,050
----------$ (90)
fav.
======
$4,500
$3,960
-----------$540
unfav.
======
Favorable fixed overhead efficiency variance
Normal capacity hours (5000) × Fixed overhead rate ($0.90)
Actual hours worked (4,400) × Fixed overhead rate ($0.90)
Unfavorable Idle capacity variance (600 hours × $0.90)
Problem 5:
Variance Analysis:
On May 1, Bovar Company began the manufacture of a new mechanical device known a "Dandy." The
company installed a standard cost system in accounting for manufacturing costs. The standard costs for a
unit of Dandy are:
Materials: 6 lbs. at $1 per lb.
Direct labor: 1 hour at $4 per hour
$ 6.00
$ 4.00
Factory overhead: 75% of direct labor
cost
Total
$ 3.00
----------$13.00
======
The following data were obtained from Bovar's record for may:
Actual production of Dandy
Units sold of Dandy
Sales
Purchases (26,000 pounds)
Materials price variance (applicable to May
purchase)
Materials quantity variance
Direct labor rate variance
Direct labor efficiency variance
Factory overhead total variance
4,000 units
2,500
$50,000
27,300
$1,300
unfavorable
1,000
unfavorable
760
unfavorable.
800 favorable
500
unfavorable
Required:
1.
2.
3.
4.
5.
6.
Standard quantity of materials allowed (in pounds).
Actual quantity of materials used (in pounds).
Standards hours allowed.
Actual hours allowed.
Actual direct labor rate.
Actual total factory overhead.
Solution:
Actual production
Standard materials per unit
Standard quantity of materials allowed
Standard quantity of materials allowed
4,000 units
6 pounds
-------------24,000
pounds
=======
24,000
pounds
Unfavorable materials quantity variance ($1,000 variance / $1 standard price 1,000 pounds
per pound)
Actual quantity of materials used
Actual production
Standard hours per unit
Standard hours allowed
---------------25,000
pounds
========
4,000 units
1 hour
-------------4,000 hours
Standard hours allowed
Favorable direct labor efficiency variance ($800 variance / $4 standard rate
per direct labor hour)
Actual hours worked
Standard direct labor rate
Unfavorable direct labor rate variance ($760 variance / 3,800 hours actually
========
4,000 hours
(200) hours
-------------3,800 hours
=======
$4.00
0.20
worked)
-----------$4.20
======
Actual direct labor rate
Standard factory overhead (4,000 units produced × $3 standard
overhead rate per unit)
Unfavorable factory overhead variance
Actual total factory overhead
$12,000
500
------------$12,500
=======
Case A:
Effect of Assumed Standard Levels:
Harden Company has experienced increased production costs. The primary area of concern identified by
management is direct labor. The company is considering adopting a standard cost system to help control
labor and other costs. Useful historical data are not available because detailed production records have
not been maintained.
To establish labor standards, Harden Company has retained an engineering consulting firm. After a
complete study of the work process, the consultants recommended a labor standard of one unit of
production every 30 minutes, or 16 units per day for each worker. The consultants further advised that
Harden's wage rates were below the prevailing rate of $ per hour.
Harden's production vice-president thought that this labor standard was too tight, and from experience
with the labor force, believed that a labor standard of 40 minutes per unit or 12 units per day for each
worker would be more reasonable.
The president of Harden Company believed the standard should be set at a high level to motivate the
workers and to provide adequate information for control and reasonable cost comparison. After much
discussion, management decided to use a dual standard. The labor standard of one unit every 30
minutes, recommended by the consulting firm, would be employed in the plant as a motivation device,
while a cost standard of 40 minutes per unit would be used in reporting. Management also concluded that
the workers would not be informed of the cost standard used for reporting purposes. The production vicepresident conducted several sessions prior to implementation in the plant, informing the workers of the
new standard cost system and answering questions. The new standards were not related to incentive pay
but were introduced when wages were increased to $7 per hour.
The standard cost system was implemented on January 1, 19--. At the end of six months of operation,
these statistics on labor performance were presented to executive management:
January
February
March
April
May
Jun
Production (units)
Direct labor hours
Quantity Variances:
Variance based on labor standard (one unit each 30 minutes)
Variance based on cost standard (one unit each 40 minutes)
5,100
3,000
5,000
2,900
4,700
2,900
$3150 U* $2,800 U $3,850 U
$2,800 F $3,033 F $1,633 F
4,500
3,000
Materials quality, labor mix, and plant facilities and conditions have not changed to any great extent
during the six month period.
Required:
1. A discussion of the impact of different types of standards on motivations, and specifically the
likely effect on motivation of adopting the labor standard recommended for Harden Company by
the engineering firm.
An evaluation of Harden Company's decision to employ dual standards in its standard cost
system.
Answer:
1. Standards are often classified into three types - theoretical (tight), normal (reasonable), or
expected actual (loose). Standards which are too loose or too tight will generally have a negative
impact on workers motivation. If too loose, workers will tend to set their goals at this low rate, thus
reducing productivity below what is obtainable; if too tight, workers will realize that it is impossible
to attain the standard, become frustrated, and will not attempt to meet the standard. An attainable
or reasonable standard which can be achieved under normal working conditions is likely to
contribute to the worker's motivation to achieve the designated level of activity.
If executive management imposes standards, workers and plant management will tend to react
negatively because they feel threatened. If workers and plant management participate in setting
the standard, they can more readily identify with it and it could become one of their personal
goals.
2.
In Harden's case, it appears that the standard was imposed on the workers by management. In
addition, management used an ideal standard to measure performance. Both of these actions
appear to have had a negative impact on output over the first six months.
Harden made a poor decision to use dual standards. If the workers learn of the dual standards,
the company's entire measurement system may may become suspect and credibility will be lost.
Company morale could suffer because the workers would not know for sure how the company
evaluates their performance. as a result, disregard for the present and any future cost control
system may develop.
Case B:
Factory Overhead Variance Analysis:
Strayer Company uses a standard cost system and budgets the following sales and costs for 19-Unit sales
20,000
4,4
3,1
$5,250U $5,950 U $6,30
-0$933U $1,16
*U = Unfavorable; F = Favorable
2.
4,300
3,000
Sales
Total production cost at standard
Gross profit
Beginning inventories
Ending inventories
$2,00,000
130,000
70,000
None
None
The 19-- budgeted sales level was the normal capacity level used in calculating the factory overhead
predetermined standard cost rate per direct labor hour.
At the end of 19--, Strayer Company reported production and sales of 19,200 units. Total factory
overhead incurred was exactly equal to budgeted factory overhead for the year and there was underapplied total factory overhead of $2,000 at December 31. Factory overhead is applied to the work in
process inventory on the basis of standard direct labor hours allowed for units produced. Although there
was a favorable labor efficiency variance, there was neither a labor rate variance nor materials variances
for the year.
Require: An explanation of the under-applied factory overhead of $2,000, being as specific as the data
permit and indicating the overhead variances affected. Strayer uses a three variance method to analyze
the total factory overhead.
Answer:
Under-applied factory overhead will arise when actual factory overhead incurred is larger than the
standard amount of factory overhead applied to work in process. The standard amount of factory
overhead applied to work in process is based on actual rather than on budgeted units of output.
Based on the information given, the sum of the factory overhead spending, efficiency, and idle capacity
variances resulted in an unfavorable total factory overhead variance of $2,000.
The factory overhead efficiency variance must be favorable because it is computed on the same basis as
the direct labor efficiency variance which was given as favorable.
Strayer would have an unfavorable idle capacity variance because the actual activity level for the year
was less than the capacity level used in calculating the standard cost rate for factory overhead.
As to the factory overhead spending variance, the balance would be unfavorable because actual costs
would have had to exceed the budgeted cost of the actual units produced since the budget allowance for
production of 19,200 units must be less than for 20,000 units and the actual costs were exactly equal to
the budget allowance for 20,000 units. The magnitude of the spending variance is indeterminate from the
information given.